And today, as insane as this is, I’m going to pick a fight with him.  Okay, not really.  But he did post today on a mortgage “myth” that he takes apart point-by-point.  Specifically, the “myth” that mortgage rates take the stairs down and the elevator up, i.e. that rates rise much faster than they fall.  He argues that this is false.  And I think his argument is all wet.

To prove his point, he calls out bond rates from the last 12 months, and shows – convincingly and correctly – that bond rates have been much more likely to fall than to rise, and more likely to fall dramatically than to rise dramatically. Here are the data:

So, if we compare these groupings to the last year’s actual, daily price changes, and we see an interesting pattern emerge for rate shoppers.

1. Days of no change in rates : 65 days trending worse, 63 days trending better
2. Days of 0.125% change : 36 days of higher rates, 50 days of lower rates
3. Days of 0.250% change : 21 days of higher rates, 50 days of lower rates
4. Days of 0.375% change : 6 days of higher rates, 3 days of lower rates

In other words, mortgage rates [sic] were unchanged for nearly half of the last 12 months. For the other half, they overwhelmingly moved toward “improvement”.

Now, we should throw out 0.125% changes because they’re somewhat “ordinary”; it’s just one tick higher or lower in rates. Instead, let’s focus on big shifts in pricing which, in turn, lead to big shifts in rates.  That’s where we see the myth debunked, specifically.

On days with big rate changes — 1/4 percent or more — decreases in rates outnumber increases by a 2:1 margin. That’s a huge difference.

His data is unassailable.  So his argument appears sound.

Except for one little bait-and-switch that he probably didn’t notice himself (see the [sic]).  These data are for bond rates.  But Dan says “mortgage rates” in his analysis.  If they were the same thing, then the data would support his premise exactly.  But they aren’t.  Everyone knows they aren’t.  There is not and never has been anything like a one-to-one correlation between bond rates and mortgage rates.

Worse than that, I think Dan’s entire premise is flawed.  Here’s the premise of his analysis:

1. Changes of less than 25 basis points often lead to no change in mortgage rates
2. Changes of 25-37.5 basis points often lead to a 0.125% change in mortgage rates
3. Changes of 37.5-75 basis points often lead to a 0.250% change in mortgage rates
4. Changes of 75+ basis points often lead to a 0.375% change in mortgage rates

But this isn’t true, or at least, it’s only true in one direction – higher. There’s a reason that it’s proverbial among mortgage people that rates are sticky down, that they don’t drop nearly as fast as they rise. That is because there is a disconnect between bond movement and mortgage rate movement. When bonds move higher, rates should fall, and they do, but not very fast.  And when bonds move lower, rates should rise, and they do, but far out of proportion to the movement in bonds.

Dan has his data, and he points out that bonds have moved higher, taking rates down, far more often than they have moved lower, taking rates up, over the last year.  I don’t mean to be snide here, Dan, but duh.  Anyone can see that.  The bond market has been very robust this past year. Your data show exactly what we ought to see in a hot bond market.

But my data show how banks actually react to bond market movement, and what we see backs up the conventional wisdom and contradicts Dan’s argument.  To demonstrate this, I have the intraday reprices from three different mortgage lenders for the past six months.  And the story THOSE data tell is very different than the one the bond market tells.

To wit:

Intraday reprices for the better: All lenders – 29 (14, 11, and 4)

Intraday reprices for the worse: All lenders – 54 (20, 15, and 19)

There were, on top of this, five second reprices to the worse, making a total of 59, or more than two negative reprices for every one positive reprice.  Even if you throw out the most conservative lender, the total is still 39 to 25 in favor of reprices to the worse.  And yet, over this period, the FNMA 4.0 bond rose dramatically, from a low of 98.74 to a high of 104 at one point in mid-October (currently trading at 101.68).  How can this be, unless lender reaction really is skewed to raise rates instead of dropping them?  Dan’s data show that there are twice as many days of robust positive movement than negative movement in the bond market over the past year.  Taking that into account, what we see here is that lenders are four times as likely to raise rates than to drop them, when the market moves.

It’s actually even worse than that.  Lenders improved prices, in the 29 improvements, an average of .188 bps.  But the average deterioration was .262.  Not only are there significantly more deteriorations than improvements, when lenders move pricing, the moves to raise rates are far larger than the moves to lower them.  There were five days in the last six months that saw two negative reprices in the same trading day, but no days when there were multiple price improvements, this in a market where the bond rose over 600 bps in four months.

Bottom line, Dan, you have convincingly demonstrated that when bond demand is high, bonds rise.  I’m not sure this needed demonstrating, but there certainly isn’t any doubt about it after your analysis.  But you either forgot to establish the correlation between bond rates and mortgage rates, and how the movements correspond, or else the data support no such correlation.  My data are far less scientific than yours, but mine show very stiff circumstantial evidence that lenders behave exactly as the conventional wisdom says they do: they price higher faster, and more aggressively, and they drop rates reluctantly and as slowly as they can get away with.

All of which is unfortunate for rate shoppers.  Dan does conclude his post with some very sage advice: if you’re more upset with a 1/8 rise in rate than you’d be happy with a 1/8 drop – and most people are – you should be locking as fast as you can.  I’ll even extend that.  If you can live with the rate you have right now, take it, because there’s a 4x greater chance that you’ll get something worse than something better if you wait.

That was this week.

And you know how some weeks the things you mean to do and the things you have to do collide so violently that even though you are working constantly, knocking things off the to-do list with abandon, and seeing real (even some times miraculous) progress, you get to the end of the week and you realize that you accomplished almost none of the things you meant to?

That was this week, too.

Mortgages being what they are, the opportunities to do really significant good for people don’t come along every day.  When they do, you often have extremely short windows to get things moving.  That’s what happened this week, as rates dived a bit and some potential streamline refinances came into play that honestly I never thought would happen.  But you have to strike while the iron is hot, even if that puts a lot of other things – worthwhile things, even necessary things – on the back burner.  That’s what I tried to do this week, and maybe I even succeeded.  We will finish the week with more business in process than we’ve had in a year, and the immediate prospect of cutting $1450/mo in interest out of the payments of our clients, a not-insubstantial sum.

So, a good week.  I sent a son to college, set up a company, closed a purchase for a really exceptional young lady, learned to love the Tenth Doctor (but not as much as the Ninth), read Drive, by Daniel Pink (two thumbs waaaaay up), blogged a couple of times and exchanged Twitter messages with Chris Brogan.  I discovered that the most durable brand in all of business is Notre Dame football.  I debated the sociology of rites of passage with the wonderful and amazing Pastor Chuck Lovelady.  I drank homemade grape juice and took a beautiful girl to the football game.  Wrote more of my book and an article on lending in Utah.  There was some stuff I didn’t do.  But I promise not to mention any of it, if you won’t.

Go have a great weekend.  You deserve it.  Really, you do.

The Los Angeles Dodgers will not be able to catch San Diego, and will fail to make the playoffs.  Again.

My class on the History of Money will attract more students than my Thomas Jefferson Youth Certification class this fall.  The Leadership Education Academy will be a resounding success, mostly because Janette Wagner, the organizer, is one of those hyper-capable people you hope to have as your friend.

The new Wall Street Reform Act will increase the fees you pay for credit cards, restrict credit for small businesses, and raise mortgage interest rates.  This will happen gradually over the next several months to two years, so that it will be possible to blame the banks for the increases.

The Obama Administration will blame the banks for the increases.

Mortgage brokerage firms will close in record numbers in 2011, and the number of active loan officers in the US will decline by another 50% from current numbers.  In case you were unaware of this, the new financial regulations make it almost impossible for brokers to survive, due to the nature of the restrictions on loan officer compensation.  In one example, the requirement that a loan officer be compensated only from one source – either the borrower or the lender, but not both – means that either your mortgage will carry a lower interest rate and huge closing costs, or a huge rate and low closing costs, but nothing in between.  And oh, that compensation cannot be based on the interest rate, although that’s how the BANK is compensated.

Mortgage lending will continue to increase in difficulty.  Credit will be further restricted, especially to marginal borrowers.  Loan costs will rise further.  Incidences of mortgage fraud will skyrocket.  The correlation will equal causation, but no one in any major publication or network will understand that.  It goes without saying that no one in the government will.

The Republican Party will take control of the House of Representatives in November.  The Senate will remain in Democrat hands.  Harry Reid will survive.

I will become Foursquare Mayor of Emmett’s and Ethel’s.

Mortgage interest rates will remain below 5% until November.  The GOP victory will cause them to rise, because a GOP win will be viewed as good for business – the stock market – and bad for government – the bond market.  Money will move from bonds into stocks and rates will rise.  The rise will be seen as a bad thing by most people, and will make possible charges that the Republicans have screwed up the only good part of the economy before they even take office.

The Obama Administration will charge the Republicans with screwing up the economy before they’ve even taken office.

My book, The Six Channels of Marketing, will be completed, and over 100 people will have enrolled in the PerfectHome program, by Hallowe’en.

The Utah Jazz will fail to sign another free agent.  Mehmet Okur will report to camp but be physically unable to perform until midseason.  The lack of a long-range shooter will restrict the effectiveness of the Jazz low-post players.  By December the Jazz will nonetheless be second behind Oklahoma City in the Midwest Division.

My sister Diana’s children will both sleep through the night – the same night – by Labor Day.

The final book of the Hunger Games Trilogy, Mockingjay, will deservedly become a New York Times bestseller, despite (because of?) its highly anarchic political bent.  Someone will be smart enough to see a gigantic business opportunity in the production of mockingjay pins.  An entire generation of young adults will be un-indoctrinated, and dedicate their lives to the preservation of individual liberty.  And the world will be saved.  So you see, there’s nothing to worry about.

Your predictions are welcome in the comments, and you may also submit additional topics for me to answer with a gaze into the Crystal Ball.  Which I predict the next edition of in 30 days.

Let’s get to it.

MARKET: the market is down a bit today, off about 25 basis points.  For those just joining us – hey there, Tyler, Corrine, and Taylor – what that means is that the bond we track, the FNMA 4.5% 30-year bond – is being sold off and its price is declining.  It also means that the yield on that bond is rising.  Since lenders hedge their lending by buying those bonds, when the yields on them rise, mortgage rates rise with them.  So today mortgage rates are increasing.  Not very much, but a little.  More than we’ve seen in a month.

ANALYSIS: Markets rise and markets fall.  The big news over the past few weeks has been the increasing probability that we’ll see a market slump over the last half of the year and into next year.  There is also a real fear that next year could be truly ugly.  With the Bush tax cuts sunsetting on January 1, businesses will be moving their cashflow into the latter half of this year to avoid the explosive tax increase.  Dividend taxes nearly triple, which will be terrible for pension funds, and every single tax bracket will see tax increases.

Anyone that thinks that won’t have a huge negative impact on economic growth is not a serious person.  There is a chance – really, a pretty good one – that Congress will do something about an extension for part of the cuts, especially those that will have the smallest economic, but largest political, impact.  As of this moment, however, it doesn’t seem a good time to invest in stocks.  Bonds, as a result, have been flourishing, driving interest rates to 4.5% and even lower on some programs.

ACTION: We may have hit the bottom of this trench in mortgage rates.  Those of you that have been thinking now might be a good time to buy, now might be a good time to buy.  For refinances, I’m willing to go out on a limb and say it’s now or never.

Until next time, we’ll keep up the RateWatch.

Cj

Analysis: Markets liked Ben Bernanke’s testimony yesterday.  He’s forecasting more unemployment, and the economy hitting a bottom here and starting to climb late this year or early next.  But he’s also telling us that he sees a slow climb, with no huge bounce, especially in real estate.  This is what is called an “L” recession, where things fall and then plateau at the new, lower level.  I think that’s a good analysis.  I expect the same, for a good while, until US households shed more debt and build more cash.  Right now it is the cash dearth that is starving the economy.  That dearth has been created by huge appetites for debt.  Eventually, all debt payments come a’cropper, and that’s what is happening now.  It will pass, if we’re smart, and if the government doesn’t insist on a recovery according to some electoral timetable.

Which is why I’d get my own house in order as fast as possible.  We’re not all that smart, and the government always acts according to electoral timetables.  The basics still work, though, people.  Save some, pay off your debt, find someone to help and help them.  That’s the way through.

Cj

Analysis: What’s to analyze?  It’s a holiday week.  There are about 6 bond traders working, and all of them are taking off around noon.  There’s no volume to speak of, and the volatility that usually accompanies light volume is being muted because all the economic data are conflicting with themselves.  Yes, folks, “data” is a plural.  No, really.  Look it up.

Cj

P.S. Unless something truly wondrous occurs in the next couple days, you’ll next hear from me on Monday. Tomorrow is my birthday, Thursday is my son Crispin’s 13th birthday, and Saturday is some other birthday that I can’t remember.  Has to do with barbecues, I think.   But as always, if you have questions, I’ll be here.

P.S. Having been a Tar Heel fan all my life, I gotta say, the sky is the appropriate blue today.